VAT recovery: how to automate this tedious process
Published on March 24, 2023
Companies are focusing on pinching pennies at the moment. Besides careful planning, budgeting, and reforecasting, what else can be done?
Luckily, companies can recover VAT to recoup some money. We’ll tell you how in this brief guide to VAT recovery.
What is VAT?
For a quick refresher, VAT, or value-added tax, is a type of sales tax that’s implemented throughout the supply chain. It’s applied to goods and services, and it’s what’s known as an indirect tax: the tax is imposed on the business, who passes on the cost to the consumer.
Every country has their own rules and regulations surrounding VAT, but this article will focus on the UK.
What does VAT recovery mean?
To be eligible for VAT recovery, your company must be VAT-registered. You’ll need turnover of at least £85,000 over the previous 12 months to register for VAT. We have more detailed information about eligibility here.
But what does VAT recovery actually mean?
When companies pay for goods or services, they’re subject to paying VAT on their purchases, just like individuals are. But the good news is that companies can get a refund of these VAT expenses on some of their purchases.
And in this current macroeconomic environment, it’s crucial to save money wherever possible. In fact, companies could be losing up to 12% of revenue due to unclaimed VAT!
But the rules around VAT recovery can be murky, and oftentimes companies opt to skip VAT returns, thinking that it’s too complicated or more hassle than they’re worth.
VAT recovery eligibility
First, you need to know what expenses are and aren’t eligible for VAT recovery.
Eligible business expenses:
Items you buy to use for your business
Business travel expenses
Company cars (including fuel, and sometimes even maintenance and parking)
Business assets above £50,000 (although be careful as these fall under the Capital Goods Scheme)
Expenses not eligible for VAT recovery:
Business entertainment (entertaining clients or hospitality costs)
Anything for personal use
Any goods or services that you buy but don’t charge VAT on (called VAT-exempt supplies)
As always, check the HMRC website if you have a special case or questions about eligibility.
How to claim VAT
Before taking the steps to reclaim VAT, remember that you always need proof. Document all purchases, and make sure to keep receipts. This includes proving that you charged VAT as well.
A digital spend management tool will come in handy here; uploading and storing your receipts on a dedicated platform means it’s not the end of the world if you lose your paper receipts.
Reminder: only VAT-registered companies can reclaim VAT. Once you’ve registered, processing takes about a month. Keep a close record of your sales and purchases during this period (as always), because your VAT accounting begins when you submit your registration.
Most companies claim every three months. You can submit your return online, and the deadline is one month and seven days after the end of the accounting period, per HMRC’s website.
According to HMRC, you must include the following in your return:
your total sales and purchases
the amount of VAT you owe
the amount of VAT you can reclaim
the amount of VAT you’re owed from HM Revenue and Customs (HMRC) (if you’re reclaiming VAT on business expenses)
For step-by-step instructions on how to fill out your return, see HMRC’s guide.
When it comes to submitting your return, you have a few options:
Submit on paper, if you fulfil certain eligibility criteria (but beware the £400 fine if you submit on paper if you’re not eligible!)
Submit using software compatible with Making Tax Digital
Via your VAT online account
Appoint a professional accountant or tax adviser to submit for you
If you owe, you must pay VAT bills electronically.
Should you find that you’ve made a mistake, you have up to four years to correct any errors. Just include them on your next VAT return, unless the error is £50,000 or more. In that case, you’ll need to submit extra paperwork.
You’re subject to penalties if you submit your return late, so make sure you send in your VAT return on time. Unfortunately, the penalties increase the longer you wait.
How to recover VAT easier and faster
There are a few best practices to implement to ensure you recover your VAT easier and faster.
You need meticulous records; there’s no way around this. But individually checking and recording every single expense isn’t the answer.
First, an expense tracking tool lets you monitor every on-the-go expense your team has. It’s vital to capture every receipt along the way, and that the solution you choose automatically extracts VAT.
But large invoice payments also involve VAT, so you’ll need to track these carefully as well. A good invoice management process will help. Same thing: save every invoice and make sure that VAT is clearly recorded.
Most companies track these different forms of payments separately, but the most efficient option is a spend management tool that handles all your non-payroll spend.
In one place you can track every one of these payments throughout the year, without wasting hours and hours on data entry or chasing team members for receipts.
To make VAT recovery easier, digital tools are a must. Any spend management tool worth its salt will have automatic VAT extraction. Once you have full visibility on your expenses, including separate VAT, you’ll have a clear view of where your company stands financially.
Smart spend management tools like Spendesk will make VAT recovery easier and save countless hours of the finance team’s time. Don't wait; automate this tedious process today.